Universities Hit by US Funding Drain Have Legal Means to Recover

If there was ever time for universities to raid their endowments, it may be now, as they face existential threats to education, research, independent thought, and the search for truth.

The latest salvo against higher education came with the House Republicans’ tax bill that would impose up to a 21% tax on investment earnings of college and university endowments. This follows the Trump administration’s withholding of billions of dollars of scientific research funding from private universities under the pretext of eradicating antisemitism and anti-wokeism.

Universities across the country are now freezing hiring, curtailing Ph.D. admissions, and laying off employees. Higher education may soon need to find alternative sources of funding. Schools for whom tapping endowments is the necessary and unfortunate answer should proceed carefully and within the bounds of the law.

If a nonprofit such as a university needs to use its endowment to survive, the law provides an escape valve known as the doctrine of cy pres, which roughly means as “as close as possible,” that allows courts to modify the purposes to which nonprofit assets must be devoted. Given the existential threat to legal purposes of universities, now may be the right time to ask the courts to apply cy pres.

Under the doctrine, a state court may allow a nonprofit to modify a restriction on the purposes to which charitable purposes must be devoted under very specific conditions—if it becomes unlawful, impossible, impracticable, or wasteful for a charity to carry out its purposes. The process requires notice to, and typically involves cooperation with, the state attorney general.

Because it isn’t unlawful, impossible, or wasteful for a university to carry out its educational purposes, this leaves impracticable. While impracticable is an ill-defined concept and courts rarely specify exactly how they use the term, courts have applied it when failure to release a financial restriction would frustrate the advancement of a valid charitable purpose. Courts have allowed universities and hospitals to use restricted principal to avoid closures that would frustrate the donors’ intentions.

Billions of dollars continue to sit in endowments. With financial markets in disarray, it’s hard to pin down precise numbers, but reasonable estimates suggest that the top 658 university and college endowments alone held close to $900 billion during 2024.

Universities can seek legal permission to access endowment funds, and their presidents likely can figure out how to redirect assets subject to donor-imposed restrictions. But fiduciaries should take advantage of several intermediate steps available to them first. Then, if they must dip into the endowment, they should follow the laws that could allow them to do so.

Not all the assets that universities identify as part of their endowments are truly endowment assets—a legal term meaning assets that are restricted by donors and aren’t wholly expendable on a current basis. This is lost in all the calls to tap endowments.

A lot of value is held in what is sometimes known as “quasi” or “self-designated-”endowment. These assets are set aside by the nonprofit itself, akin to money an individual might set aside monthly to save for a vacation.

Older estimates suggest that perhaps between one-quarter and one-third of what is known as “endowment” is actually self-designated, quasi-endowment, or similarly less restricted than funds that meet the legal definition of endowment and, therefore, fiduciaries have greater authority to use them in an emergency. Fiduciaries may decide they must repurpose true endowment funds to continue advancing the university’s legal purposes. If so, they shouldn’t engage in self-help in releasing restrictions.

In all states, the law forbids charities from distributing more than a prudent amount to themselves. Some states set a specified amount beyond which the charity is presumed to be imprudent, such as 7% in New York and California. With few exceptions, such as where donors themselves may release restrictions or nonprofits hold old, small funds, universities may not unilaterally release endowment or other forms of donor-imposed restrictions.

These laws stand even when a nonprofit wants to help the needy or to head off insolvency, regardless of what anyone believes would make sense. Otherwise, charities must petition the courts to release restrictions.

Some of these rules are pragmatic. For example, potential donors will be unlikely to give if they see nonprofits releasing restrictions when they become inconvenient.

Other reasons for honoring restrictions are value-based. While some critics worry that perpetual restrictions on endowment empower long-dead hands, these restrictions seem less troubling when one considers that this vast wealth is largely dedicated to purposes that have been around as long as humanity—education, religion, health care, scientific research, and the arts.

Intergenerational fairness requires us to provide our children with financially sound institutions such as major universities, hospitals, and arts organizations so they can use them to advance their own visions of a good and generous society.

If universities need endowment funds for education to survive, they should resist the urge to violate the law, even if they can. Fortunately, they don’t need to.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jill R. Horwitz is the David Sanders Professor of Law and Medicine at UCLA School of Law and a visiting law professor at Northwestern University.

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